Treasury Plots Morgan Stanley Bailout

The Treasury Department has been working on a term sheet for injecting new capital into Morgan Stanley, a person familiar with the matter said. The plan is to make the capital injection alongside Mitsubishi.

The Federal Reserve urged the Treasury Department to immediately inject capital into Morgan Stanley, fearful the investment bank could fail after a week of trouble in the equity and credit markets.

Although the plan is still being formulated, it seems likely that it will be put in place in the very near future, perhaps as early as this weekend. The basic outline of the rescue will follow the program announced by Hank Paulson tonight. Paulson said the government would take equity stakes in banks, a part of a "standardized program" that could be applied to "a broad array of financial institutions." The program would be designed to encourage investors to put private capital into financial institutions.

For Morgan Stanley, the government would likely make a capital investment taking either warrants or equity shares while promising to be a passive investor not engaged in the command or control of the company. The exact terms are still be discussed.

This is what the Treasury and Fed have been planning for Morgan Stanley.